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Report From Executive Compensation Critic Shows CEO Realized Pay Decreased for Second Straight Year in 2016

July 21, 2017

This week, the Economic Policy Institute issued its annual executive compensation study, reporting that realized pay among the CEOs of the largest 350 companies by sales was $15.6 million in 2016, compared to $16.3 million in 2015 and $16.5 million in 2014, and concluding that the difference was the reduction in compensation realized through stock options exercises. The report states that the ratio of CEO to the average annual pay of the “typical worker” was 271-to-1 in 2016, compared to 286-to-1 in 2015 and 299-to-1 in 2014, all much lower than recent estimates by the AFL-CIO. EPI is a think tank which focuses its research on low and middle income workers and is frequently critical of executive pay.

Critics of executive compensation have long focused on stock options as a primary cause for increased CEO pay, and thus the study examines the potential reasons for the decrease in stock option exercises but finds no conclusive evidence as to the reason for the drop. The stock market increased in 2016, eliminating the rationale that CEOs waited to exercise their options. Dividing the CEOs in the study into quintiles by pay, the study found that the companies of CEOs in highest and lowest quintiles, both of which exercised fewer stock options, did not perform worse than the companies in the middle quintiles. (Ironically, the CEOs in the highest pay quintile saw a 25% decrease in realized pay from stock options.) Nor did the study find that CEOs were “stockpiling” options for future exercise. Interestingly, the study did not look at whether the ongoing shift from stock options to performance shares and other long-term incentive payouts, has played a role. The study showed LTIP payouts decreased in 2016 as well.

As it has in past reports, EPI contends that the overall higher level increases in CEO pay relative to other workers are the result of “their power to set pay” not because of the market for talent (contrast this with the story above on the summary of research in this area which does not find managerial power as the primary source of CEO pay increases.) The report argues that even though realized pay is decreasing, overall CEO pay should be reduced, and thus policymakers should consider the following changes: increase marginal tax rates for high earners, eliminate corporate tax deductions for performance-based pay under Section 162(m), set higher tax rates for corporations that have higher CEO-to-worker pay ratios (similar to state and local proposals) and put more teeth into say on pay (e.g., a binding vote).